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Delaware Federal Court Examines Pleading Standard for Fraudulent Inducement Claims Under Delaware Law

John L. Hopkins v. Concorde Career Colleges, Inc.
Case No. 15-206-LPS (United States District Court for the District of Delaware, March 29, 2016)
by Richard J. Medoff, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.ded.uscourts.gov/sites/default/files/opinions/lps/2016/march/15-206.pdf

In John L. Hopkins v. Concorde Career Colleges, Inc., the former CEO of a company that operates for-profit colleges filed a lawsuit against the company after he was fired, and the company filed a counterclaim alleging that the former CEO fraudulently induced the company to offer him the position as its CEO. The former CEO filed a motion to dismiss the company’s counterclaim for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The United States District Court for the District of Delaware concluded that the company failed to plead specific facts that lead to a reasonable inference that the former CEO knew or believed his promises to the company were false at the time he made them. Thus, the Court granted the former CEO’s motion to dismiss the company’s counterclaim.

By way of factual background, Defendant Concorde Career Colleges, Inc. (“Defendant” or “Concorde”) operates for-profit colleges across the United States. On March 21, 2014, Defendant's CEO separated from the company. Shortly thereafter, Defendant began a search for a new CEO. As part of the process, representatives for Defendant met with Plaintiff John L. Hopkins (“Plaintiff” or “Hopkins”) to discuss the possibility that he would serve as Defendant's new CEO. During these and other meetings, Defendant indicated that if Plaintiff were to serve as CEO, it would be essential for him to “dedicate his full time and attention to Concorde” and to “be physically present at Concorde's headquarters and its campuses.” Plaintiff acknowledged these conditions and promised that, if chosen as CEO, he would maintain a physical presence at Defendant's headquarters and campuses and would dedicate his full time and attention to the job.

Defendant alleged that “when Hopkins made these representations ... he knew them to be false or made them with reckless indifference to their truth.” Defendant further alleged that Hopkins made the statements to induce Defendant to offer him the position of CEO and that, once hired, he did not dedicate his full time to his duties and did not maintain an adequate physical presence at Defendant's headquarters and campuses.

On October 30, 2014, Plaintiff and Defendant executed an agreement extending Plaintiff's tenure as CEO through 2018 and allowing for termination only “for cause.” Several days later, however, Defendant terminated Plaintiff’s employment.

On March 3, 2015, Plaintiff filed a lawsuit against Defendant alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and retaliation under the False Claims Act and the Delaware Whistleblowers' Protection Act. On April 6, 2015, Defendant filed a counterclaim alleging that Plaintiff fraudulently induced Defendant to offer Plaintiff the position as its new CEO. Subsequently, Plaintiff filed a motion to dismiss Defendant’s counterclaim for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).

The Court began its analysis by noting that, when a claim involves an allegation of fraud, a higher pleading standard must be satisfied. In such a case, the Court explained, a plaintiff “must state with particularly the circumstances constituting fraud or mistake;” however, “malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” See Fed. R. Civ. P. 9(b).

Next, the Court noted that in order to state a claim for fraudulent inducement under Delaware law, a party must adequately allege each of the following elements:

(1) the [other party] falsely represented or omitted facts that the [other party] had a duty to disclose; (2) the [other party] knew or believed that the representation was false or made the representation with a reckless indifference for the truth; (3) the [other party] intended to induce the [alleging party] to act or refrain from acting; (4) the [alleging party] acted in justifiable reliance on the representation; and (5) the [alleging party] was injured as a result of this reliance.

Mkt. Am., Inc. v. Google, Inc., 2010 WL 3156044, at *4 (D. Del. Aug. 9, 2010). The Court explained that statements that “are merely promissory in nature” are generally not actionable as fraud, however, there is an exception to this rule when the promisor “had no intention of performing at the time the promise was made.” See Grunstein v. Silva, 2009 WL 4698541, at *13 (Del. Ch. Dec. 8, 2009); Winner Acceptance Corp. v. Return on Capital Corp., 2008 WL 5352063, at *7 (Del. Ch. Dec. 23, 2008).

Concorde contended that its counterclaim came within the exception. Specifically, Concorde argued that Hopkins acted fraudulently when he promised to dedicate his full time and attention to Concorde and when he further promised to be physically present at Concorde's headquarters and campuses every work week. Concorde contended that these promises were fraudulent because Hopkins had no intention of honoring them at the time he made them.

Upon review of the allegations in Defendant’s counterclaim, however, the Court agreed with Plaintiff that Concorde had failed to state a claim for fraudulent inducement. According to the Court, Concorde had failed to adequately allege that Hopkins knew or believed his promises - to dedicate his full time and attention to Concorde and to be physically present at Concorde's headquarters or campuses every work week - were false at the time he made them.

The Court explained that Concorde's allegations that Hopkins knew his representations to be false and that he had no intention of honoring them were merely conclusory, noting that the counterclaim alleged nothing more than: “On information and belief, when Hopkins made these representations to Concorde, he knew them to be false or made them with reckless indifference to the truth of the representations.”

While fraudulent intent may be alleged generally under Rule 9(b), the Court noted that a conclusory statement was insufficient and that Concorde was required to “plead specific facts that lead to a reasonable inference that the promisor [i.e., Hopkins] had no intention of performing at the time the promise was made.” See Grunstein, 2009 WL 4698541, at *13. According to the Court, Concorde had failed to do so.

The Court further noted that, in its briefing, all that Concorde added to its pleading was that Hopkins gave “repeated assurances that he would fulfill [his] duties,” arguing that these repeated assurances supported an inference that Hopkins never intended to honor his promise. The Court found, however, that this was also insufficient to raise a reasonable inference that Hopkins had no intention to honor his promises. The Court explained that, without any allegation of any specific facts, it was “at least equally plausible that the repeated assurances indicated that Hopkins was truly committed to honoring his promise.” Citing Grunstein, the Court noted that “a party's failure to keep a promise does not prove the promise was false when made.” 2009 WL 4698541, at *3. According to the Court, it followed that “repeated assurances that one will keep his promise likewise does not demonstrate that the promise was false when made.”

For the foregoing reasons, the Court granted Plaintiff’s motion to dismiss Defendant’s counterclaim.